Claims that one of the state's largest power stations used the partial monitoring of its units to manipulate pollution estimates have prompted the environment watchdog to investigate all plants in NSW.

The Bayswater power station in the Hunter Valley was only required to report pollution from one of its four generation units. Staff were instructed to supply lower sulphur coal to the unit being monitored while dirtier coal was burnt in the other three, according to participants attending a public meeting held with current plant owners AGL in Muswellbrook in March.

AGL does not deny the station, which it bought from state-run Macquarie Generation in 2014, deliberately blended coal to mask the true emissions of nitrous oxides, sulphur dioxide and other pollutants. The company says it can't comment on operations prior to its takeover and has since introduced monitoring of all four units.

"Blending of coal can be done, at the coal mine or power station, to meet supply agreement conditions, and ensure compliance with air quality protection guidelines and [Environment Protection Authority] licence requirements," Rob Cooper, an AGL spokesman said. "This is common practice in the industry."

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Bayswater power station near Muswellbrook in the upper Hunter Valley.Credit:Rob Homer

The EPA, though, now wants to find out whether Bayswater and other plants have under-reported emissions in the past or continue to do so. It has contacted all currently operating and licensed power stations in NSW to clarify their reports for the National Pollution Inventory, requiring answers within six weeks, a spokeswoman said.

'A lot of zeroes'

A former engineer at Bayswater told Fairfax Media the practice of burning variable quality coal to curb pollution readings had been going on since at least 2000.

"Everyone knew [the coal blending] was dumb and the system wasn't going to achieve what it set out to do," the engineer said. "We were told 'these are the rules and this is what we need to do'."

Burning cheaper coal, such as from the Wilpinjong mine, provided significant savings for the plant, which added up "to a lot of zeroes", he said.

Bayswater routinely sought to mask its emissions, a former engineer says.Credit:Max Mason-Hubers

Mr Cooper, the AGL spokesman, did not deny the previous owner had distorted the plant's true emissions, but said his company had acted "voluntarily" to provided continuous disclosure of pollution.

He declined to respond to questions about whether AGL's other big Hunter Valley plant, Liddell, also engaged in coal blending to take advantage of partial monitoring.

James Whelan, a researcher with Environmental Justice Australia, said it was "mindblowing" a power station would use reporting loopholes to mask higher pollution.

"If you were a conspiracy theorist, you couldn't cook it up better than that," said Dr Whelan, who attended the Muswellbrook meeting. "The NSW EPA is failing to control toxic pollution from the state's coal-fired power stations."

A spokesman for Environment Minister Gabrielle Upton said the government would "respond as appropriate" to the EPA's investigation.

"The report that some energy operators may be in breach or may be gaming the system is of great concern," Adam Searle, Labor's energy spokesman, said. "The government needs to ensure the integrity of pollution limits, the monitoring and reporting is maintained."

'Tens of millions'

Jeremy Buckingham said any deliberate deception would have consequences for health and the environment, and any directors or managers involved should face prosecution.

"This deception meant that these power stations not only got cheaper, dirtier coal, but they also avoided paying the pollutant fees under the load-based licensing scheme," Mr Buckhingham said. "If this deceit is industry-wide then the total amount of pollutant fees avoided may be many tens of millions."

Bayswater alone paid $51 million in the 14 years to 2015 for the pollution it pumped out, he said. It may also have dodged paying some of the federal carbon tax.

"The EPA should have known there was a significant incentive for the power stations to cheat on their emissions reporting. The pollutant monitoring system needs to be overhauled so that what is coming out of the smoke stacks is exactly what is reported."

Origin Energy, which bought the Eraring power station in 2013 from the government, said it "does not currently blend coal for use in the generating units at Eraring Power Station", according to a spokesman.

"All four generating units at Eraring are monitored annually consistent with the power station's licence conditions and emissions monitoring data is published on the Origin website and in annual sustainability reporting."

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A spokeswoman for EnergyAustralia, which operates the Mount Piper power station near Lithgow, said the plant had "no capacity" to blend its coal from other sources.

"There is some variation in the composition and quality of the coal across the mine but this is just the natural variation of the resource," she said.